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Aeropostale Is Flying High

The teen retailer posted solid December sales numbers and lifted its earnings guidance for the fourth quarter.

Aeropostale(NYSE:ARO) just gave its investors a belated holiday gift -- it raised its earnings guidance for the fourth quarter. And with the stock heading toward new highs versus new lows, I think we have our confirmation of a question I posed last November on whether Aeropostale was a buy or a sell.

Honestly, Aeropostale's results were solid, but nothing to write home about. Sales for December increased 12.6% over last year, aided by a gain in same-store sales of 1.7%. For the year, sales increased 16%, aided by a 1.7% gain in same-store sales. Stripping out a one-time gain of $6.5 million, earnings are still set to grow soundly at 20% for the year.

However, what investors have been nervous about is the strength of the consumer this holiday season. And Aeropostale's results removed any lingering fear that the company's earnings would crash and burn. (Case in point, Hot Topic's (NASDAQ:HOTT) shares dropped 20% today due to its recent poor performance.)

No doubt selling clothing to teenagers can give investors a bumpy ride -- Aeropostale's price chart confirms the volatile nature of the industry. However, when a solid company is put on sale by investors, it is often an opportune time to hop on board, as Joel Greenblatt seems to have done. I believe that holds true for Aeropostale.

First of all, the company earns solid returns on its invested capital even when accounting for operating leases. The company also has a solid balance sheet with no long-term debt and $203 million in liquid assets (as of the last 10-Q). Outstanding stock options are roughly 3% of the total share count, showing signs of a prudent management team. The growth in its store base -- which has managed to double in four years, from 367 in fiscal 2003 to 728 today -- has been achieved while maintaining profitability. Lastly, the rebirth of the Jimmy'Z concept, which targets 18- to 25-year-olds, presents a significant opportunity for Aeropostale to continue its solid growth.

The one trouble spot to keep an eye on is Aeropostale's low comparable same-store sales, which are a sign that the company is having trouble maintaining its operating margins. While the company's margins are still more than satisfactory, watching Gap's (NYSE:GPS) continued drop in comparable same-store sales, which fell 8% for December, shows what can happen to operating margins.

The problem now is that we've confirmed Aeropostale was a buy. We will have to wait for Aeropostale's stock to drop again, so we too can be stock-market geniuses.